Collateralized debt obligations (“CDOs”) are financial arrangements which have become quite popular in recent years. Generally, a CDO is a special purpose investment vehicle which is established to securitize assets such as corporate bonds, corporate loans or the like. In general, a CDO is created by a party (generally referred to as the “issuer”) to hold a pool of underlying collateral or assets. The issuer then issues securities backed by the underlying collateral pool.
The cash flows generated by the underlying collateral are used to pay interest and principal on the issued securities. Each of the underlying assets have credit risk associated with them (e.g., including default and prepayment risk). The well diversified pool of assets provides additional credit enhancement to the securities issued by the CDO. Credit enhancement is further created by “tranching” the CDO (e.g., the total pool of assets may be segmented into pools by taking the underlying asset cash flows and dividing them among multiple tranches) creating different risk profiles associated with each tranche of the CDO. In this manner, securities are created which satisfy the risk and reward desires of different investors.
Investors invest in the CDO by contracting with the issuer to buy interests in one or more tranches. An investor may receive periodic interest and principal payments on the securities. A typical CDO investor may hold multiple tranches from one or more issuers.
Reference is now made to FIG. 1, where a simplified example of a typical CDO investment structure 10 is depicted. In the depicted structure 10, two issuers 12, 14 have each established a CDO (items 16, 26 respectively). Each CDO 16, 26 is structured to have multiple tranches 18, 20 and 28, 30 which hold interests in a pool of assets or collateral items. For example, the “ABC CDO” holds a number of underlying assets, including loans and bonds. The two depicted tranches of the “ABC CDO” may be structured to provide different risks based on the underlying assets (e.g., the “A” tranche may be formed based on senior secured bank loans and/or senior secured bonds).
In the depicted example structure, two investors 22, 24 have contracted with issuers 12, 14 to purchase securities offered by the issuers. Investor 22 has purchased the securities identified as “Tranche A” of “ABC CDO” from issuer 12, and has also purchased the securities identified as “Tranche A” of “XYZ CDO” from issuer 14. Investor 24 has purchased securities identified as “Tranche N” of “ABC CDO”. This represents a typical occurrence in CDO investing: a CDO investor often acquires multiple interests in CDOs, often from different issuers (or even from the same issuer). In the example depicted, this can lead to an investor (such as investor 22) holding interests in the same item of collateral through different investments. As depicted, investor 22 is exposed to credit or default risk if the asset identified as “Loan 1” defaults (“Loan 1” is included in the A Tranche of both ABC CDO and XYZ CDO). Currently, it is difficult for CDO investors to identify such multiple exposures.
Because CDO investments often include large numbers of underlying assets, it can be difficult for a CDO investor to manage and identify risks associated with these assets. Each of these assets exposes the investor to risks of default or pre-payment. These risks can be evaluated based on a better understanding of each of the assets, industry areas, and issuers.
It would be desirable to provide CDO investors with the ability to access information about the asset and issuer and exposure across multiple deals in a timely fashion. It would further be desirable to provide CDO investors with an ability to perform risk management of their investments, including an ability to aggregate exposures across different deals. It would further be desirable to provide CDO investors with an ability to perform modeling of various default and prepayment scenarios to evaluate their impact across the CDO investor's current (or desired) portfolio of deals. It would further be desirable to address deficiencies in existing CDO evaluation and monitoring tools.